The cooling spending fever

WHEN you are already feeling low, more things tend to go wrong. That seems to be the state of UK Plc as the New Year gets going. The run-up to Christmas went with a whimper, not a bang for retailers, said the CBI. Sales showed their first monthly drop in nearly four years. For the first time in a decade, they were no better than the year before.

Industry remains in the doldrums with the December purchasing managers index falling from 50 (a neutral level) to 49.5, its lowest since July. Orders are notably weak.

In recent years, the UK economy has chugged along at close to 2.5% annual growth, led by consumer spending that rose by 4%, with industry barely holding its own. Now, spending growth, which was helped by borrowing against rising house prices, may be slowing.

Do not throw yourself out the window just yet. The CBI figures are a poll of retailers rather than actual sales information. Distributors, questioned in the same survey, were much more cheerful - though that may mean that retailers ordered too much stock. The survey covered only the fortnight to December 18.

Ian McCafferty, the CBI's chief economic adviser, said: 'Maybe consumers postponed purchases to get them much cheaper in the sales.' In fact, in recent Christmases, many do just that, seeing no reason to buy an expensive outfit in mid-December when they may snap it up at half price two weeks later. McCafferty said: 'This is worrying rather than disastrous. It is too early to call the end of the consumer boom.'

Retail bosses point out that an unusually mild winter held back clothing sales. Many consumers were afraid, after 11 September, to fly abroad for Christmas 2001. This time they did travel.

Richard Hyman, at retail consultants Verdict, said: 'Things are cooling down. Christmas was a little disappointing. We think it was still up on last year and the CBI figures are excessively gloomy. This year will be significantly tougher, but not a disaster.'

Nonetheless, most of the signals now tell us that spenders are keeping a tighter grip on their wallets. Gerrard's chief economist Simon Rubinsohn thinks spending growth may slow from 4% to nearer 2%. This is ominous, as the National Insurance rise due in April may slow the pace further.

The other worry is that the consumer has carried Britain's economy forward for seven years. Had it been left to industry, growth would have been very much lower. Of course, spending cannot rise indefinitely at double the overall growth rate of the economy, but its recent strength has been particularly welcome as other sectors weakened.

The one category of spending still growing apace is the one we pay for with our taxes. Public spending could rise 5% in 2003. Half of the entire growth in the economy is likely to come from the public sector. But a surge in public spending, when tax revenue is flagging, spells further tax hikes. And growth led by the public sector - unless you work there - is unlikely to bring the same 'feelgood factor' as a consumer boom.

Fistful of dollars

JANUARY is the month for euro bulls. Most years they predict strong rises and most years they are disappointed. But last year it did rally to $1.03, and some supporters are talking it back to the $1.17 level where it began in 1999.

That could happen if Iraq goes badly wrong for the US. Markets are uneasy about a war that might cost £30bn if quick, much more if not. The US trade gap is already heading for £300bn this year, and it is set to cut taxes next week.

War will keep the dollar wobbly. It could easily slip to $1.10 or $1.13 to the euro, with the pound rising to $1.65. Bears of the dollar have had a rough time in recent years. The sums favour them now.

But Neil Mackinnon, chief economist at ECU, cautions that it could bounce strongly if Iraq goes well, taking it back to parity with the euro by year-end - just in time for the euro fan club to do its stuff again next January.